STAFF NEWS & ANALYSIS
Lehman Cash Call 'Shunned' by China and Korea
By Staff News & Analysis - August 22, 2008

China's Citic Securities and state-owned Korea Development Bank (KDB) today denied that they held formal talks this month with Lehman Brothers over buying up to half of the beleaguered Wall Street bank. Tan Ning, board secretary of Citic, China's biggest brokerage, said: "We have had no such talks as far as I know … We know there are always lots of rumours like this in the markets but we are not in formal talks with Lehman or other firms on stake investments." Ming Euoo-Sung, chairman and chief executive of KDB, went on an overseas trip last month to meet investors but a KDB spokesman dismissed speculation that Mr Min had discussed an investment with Lehman. Sung Joon Rhee, KDB's senior executive director, said on Wednesday that the Korean bank needed to remain cautious for the next few years because it did not expect problems in the US mortgage market to abate soon. … It was reported overnight that Lehman, which is expected to reveal a further $3 billion (£1.6 billion) of writedowns when the investment bank publishes its third-quarter figures next month, talked to KDB about selling a 25 percent stake directly in the bank and another 25 percent by market tender. Citic was also reported to have had less specific discussions about an investment in Lehman. Lehman wanted the investors to pay 50 percent more than the bank's book value, which the investors thought was too high, so the talks fell apart, according to reports. But today Mr Ning said that Citic planned to concentrate on its domestic business. "It seems there are no signs when the US credit problems may eventually end," he said. China's financial regulators have warned local financial groups to be careful of the risks of getting involved in the US credit crunch. Any foreign investment worth a large sum must be approved by the Chinese Cabinet. – Reuters

Dominant Social Theme: Oops. Or perhaps … See even Wall Street loses a few.

Free-Market Analysis: The big boys who play in high waters probably never expected things to get so bad so quickly. It is beyond reason to think that those at the very top did not understand the breadth of the bubble and its intricacy – but timing is always tricky, as any investor knows. Anyway, let us suppose for a moment that there is a new factor that hasn't been present in the past. And that new factor is the Internet. Things spread quickly on the Internet and perhaps public confidence is a great deal more difficult to command and control when the opposite message is burning up the wires around the world.

Beyond a doubt, central banking creates booms and busts; any mature human being, especially one working within the central banking mechanism, is well aware of how it works. Thus, none of what has happened is a great surprise. The more cynical among us might even venture that certain powerful entities expected what has occurred and were positioned to take a profit form it.

Yes, perhaps the Internet has changed things. We offer this up only because the collapse of American and British economies are seemingly occurring so quickly and because banks that one might reasonably have expected to have been somewhat immune to the worst ramifications of the credit crunch have obviously suffered.

Wall Street has suffered too but there are few large Street entities left to feel the pain, and Lehman was one of them. Another explanation for Lehman's turning and twisting in the wind is the idea that the powers-that-be have determined to sacrifice one of their own. Lehman will not be bailed out just to make sure it's obvious Wall Street has taken a pummeling.

After Thoughts

There are so many games being played at the very highest levels of finance right now that it is difficult to tell what was expected and what has "fallen out of bed." Our perspective in general, and we've offered it before on these pages, is that the money that flowed from Big Oil to the Middle East is now coming back in the form of so-called Sovereign funds to buy up distressed properties. There's a lot of money out there, recession or no. It is significant to us that Lehman did not look to the Middle East for capital but went hat in hand to China and Korea. This may not bode well for those would like to see Lehman survive as an individual entity.

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